How Does Fraud Take Hold In A Private Residential Community?

By David Swedelson, Senior Partner at SwedelsonGottlieb, Condo Attorney and HOA Lawyer

I came across an interesting article with this title written by fellow community association attorney, Donna DiMaggio Berger, who practices in Florida. As Donna states in her article, “fraud is certainly nothing new but in today’s troubling economic climate, the chance that your community may be harmed by a fraudster, especially if you don’t have a series of checks and balances in place, rises dangerously.” This is so true. I track news articles that relate to condominiums and homeowners associations around the country, and I have not been surprised by the many news articles I have seen reporting on fraud and embezzlement committed by board members and association managers. And they go to jail!

I wrote an article in 2009 entitled EMBEZZLEMENT: Don’t Let it Happen to Your Association! that chronicled the fraud and embezzlement at one Southern California community association. Fortunately for that association, I was able to recoup their entire loss of over $500,000, and the manager also went to jail. As the article points out, “the number one reason that managers (or board members) embezzle from their association is because they can. It is often too easy. A well designed, functioning internal control system is the number one defense against both errors and fraud. It is not difficult; it starts with required compliance with the Civil Code, which, among other things, mandates board member review of financials, quarterly reconciliations of the bank accounts, etc., (see Civil Code Section 1365.5).”

Donna’s article talks about the Fraud Triangle that she says has been used as a model to explain the fraud phenomenon as the first step in preventing its occurrence. This Fraud Triangle consists of the following three elements: Opportunity, Pressure and Rationalization.

She suggests that the typical fraud lasts for 2 years; at the condominium association chronicled in my article, the manager was embezzling for more than 2 years, and the board had no clue.

Donna lists things you can do to protect your community association:

• Always have a system of checks and balances in place. Require two signatures on your checks even if your bank will accept only one.

• Always have more than one set of eyes on your books.

• Always properly screen employees in advance to weed out potential fraudsters.

• Make sure your bank provides duplicate statements directly to someone else other than the person handling your books. Why do this? Because it is easy for an embezzler to use white out and a typewriter (yes, they still sell these items at the office supply store). Ask the bank to send a duplicate original to a second board member.

• If you have an association credit card, keep the limits very low, always check receipts against the statement and scrutinize receipts submitted for reimbursement to see if any personal or odd items are included in the reimbursement requests. We have had a number of our clients report managers or board members “abusing” the association’s credit card for their purchases.

• Do not allow owners to make payments in cash or by checks made payable to anyone other than the association in order to avoid skimming.

• Make sure your association’s accountant reconciles your bank statements and never relies solely on bank statements provided to him or her.

For more information about fraud prevention, Donna suggests you visit which is the website for the Association of Certified Fraud Examiners, the world’s largest anti-fraud organization and provider of anti-fraud training and education.

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